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Moody's Weekly Market Outlook Summary

Core Content

This document provides a comprehensive analysis of credit markets and economic outlooks for the U.S., Europe, and Asia-Pacific regions. It highlights changes in bond and loan issuance, credit spreads, default rates, and the impact of monetary policy on market conditions. The report also forecasts economic indicators and discusses potential risks and trends affecting various sectors.

Main Points

Credit Market Trends

• Leveraged Loans vs. High-Yield Bonds: As of 2018, leveraged loans have surpassed high-yield bonds in terms of outstanding amounts. The U.S. high-yield loan outstandings reached a record $1.365 trillion, while high-yield bonds stood at $1.280 trillion.
• Rating Outstandings: The A3 rating's outstandings reached $1.351 trillion, the highest in the corporate bond credit ratings ladder. Other ratings, except A3, were below their record highs.
• Yield Curve Flattening: The U.S. yield curve is flattening, raising concerns about potential recession in 2020. The flattening is attributed to short-term rate hikes by the Fed and increased Treasury issuance.
• Default Rates: The U.S. trailing 12-month high-yield default rate is expected to drop from 3.9% in March 2018 to 1.7% by March 2019, indicating improved credit quality.

Bond and Loan Issuance

• Investment Grade (IG) Bond Issuance: In 2017, U.S.-denominated IG bond issuance hit a record $1.508 trillion. For 2018, it is projected to decrease by 5.1% to $1.431 trillion.
• High-Yield Bond Issuance: High-yield bond issuance in 2017 was $453 billion, a record. It is expected to fall by 4.6% in 2018 to $433 billion.
• Loans and Commercial Paper (CP): Loans and CP have outpaced bonds in growth, with the sum of outstanding loans and CP rising to $2.138 trillion in March 2018, up from $2.115 trillion in December 2017.

Yield and Inflation Outlook

• Yields Better Explain Issuance: High-yield bond offerings are more sensitive to changes in speculative-grade bond yields than spreads.
• Industrial Commodity Prices: Industrial commodity prices, such as steel and lumber, have surged due to import restrictions and geopolitical tensions. However, copper prices have seen a setback.
• Treasury Yields: The 10-year U.S. Treasury yield increased by 45 bp to 2.86%, outpacing most other major economies. This may influence the trajectory of Treasury bond yields.
• Eurozone Inflation: Recent CPI inflation estimates for the Eurozone and U.K. lagged consensus, suggesting potential challenges in meeting inflation targets.

Key Economic Forecasts

U.S.

• Yield Curve Inversion: The yield curve is expected to invert by the end of 2018, increasing the likelihood of a recession in the following year.
• GDP Growth: The U.S. GDP growth is projected to face downside risks due to the flattening yield curve, but the forecast for 2018 remains stable.

Europe

• U.K. Growth: The U.K. is expected to see a slowdown in GDP growth, with a projected 0.2% q/q rise in Q1 2018, pushing the annual rate to 1.3%.
• Construction Sector: The construction sector is expected to show a sharp decline due to bad weather and ongoing Brexit-related challenges.
• Services Sector: Services output is expected to contract, with a 0.4% q/q rise, well below the 2014-2016 average.
• Monetary Policy: The European Central Bank is likely to maintain its monetary policy stance, with inflation still below target.

Asia-Pacific

• Japan: The Bank of Japan is expected to keep its monetary policy unchanged, maintaining a 0% target for the 10-year JGB and a -0.1% rate on excess reserves. The economy faces challenges with weak inflation and potential trade disruptions.
• Australia: The consumer price index is expected to cool to 0.5% q/q in the March quarter, with annual inflation remaining at 1.9%, just below the RBA's target.
• South Korea: South Korea's GDP is projected to grow 1% q/q in Q1 2018, supported by external demand and a minimum wage increase, though recent labor market weakness may temper gains.
• Philippines: The Philippines is expected to maintain strong GDP growth of 6.8% y/y, driven by robust consumer spending and investment.

Key Indicators for the Week Ahead

U.S.

• Consumer Confidence: U.S. consumer confidence is expected to rise slightly, though it remains a key indicator for economic health.

Europe

• Euro Zone Monetary Policy: The Euro Zone's monetary policy for April is expected to remain unchanged.
• Consumer Sentiment: South Korea's consumer sentiment index is projected to decline further to 107.9 in April.

Asia-Pacific

• Australia CPI: Australia's CPI for Q1 2018 is expected to be 0.5% q/q.
• South Korea GDP: South Korea's GDP for Q1 2018 is projected to grow 1% q/q.
• Philippines GDP: The Philippines' GDP for Q1 2018 is expected to rise to 6.8% y/y.
• New Zealand Trade: New Zealand's trade balance is expected to return to deficit in March.
• Japan Employment and Industrial Production: Japan's unemployment rate is expected to remain at 2.5%, and industrial production is projected to drop 0.4% m/m in March.

Conclusion

The report outlines a complex landscape of credit markets and economic indicators, emphasizing the shift in outstandings from high-yield bonds to leveraged loans, the flattening of the U.S. yield curve, and the challenges faced by various economies in the Asia-Pacific and Europe regions. It underscores the importance of monitoring yield movements, inflation trends, and policy decisions for accurate market outlooks.